What Is The True Unemployment Number?

The US Bureau of Labor reports an unchanged unemployment rate of 10% for December, but just how accurate is this number? When we add the pushed-aside category of unemployed people who have given up looking for work and the involuntary part-time workers to the equation we arrive at a much more realistic figure, and it’s not a pretty picture. See the following post from Expected Returns.

This is a very weak unemployment report as every important qualitative measure of unemployment showed further weakness. There is no recovery based on the data. From the Bureau of Labor Statistics:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

This is the official line. Let's take at a look at some of the statistical manipulation needed to come up with a 10% headline unemployment number.

Civilian Labor Force

The civilian labor force participation rate fell to 64.6 percent in December. The employment-population ratio declined to 58.2 percent. (See table A-1.) The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was about unchanged at 9.2 million in December and has been relatively flat since March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

The civilian labor force participation rate continues on its remarkable and historic downward trajectory. In order to appreciate the significance of such a contraction, it is critical to understand what the civilian labor force participation rate represents.

The civilian labor force participation rate represents the percentage of eligible, working-age individuals actively seeking work- which means looking for work in the past 4 weeks. If you haven't looked for work in the past 4 weeks, you are no longer considered unemployed in the government's land of make-believe.

Now, let's try to get a sense of how bad the unemployment situation is in what the average person would call reality, and not the land of government statistical make-believe. Curious minds will be asking why the civilian labor participation rate is declining at such a rapid pace. The answer lies in the protracted nature of the current economic downturn. From the BLS:

Among the unemployed, the number of long-term unemployed (those jobless for 27 weeks and over) continued to trend up, reaching 6.1 million. In December, 4 in 10 unemployed workers were jobless for 27 weeks or longer.

It's pretty clear that when 4 out of 10 individuals are unemployed for more than 6 months, we are talking about an environment where employers are simply not hiring. When employers stop hiring, people give up looking for work, which means they are no longer part of the civilian labor force. This individual is not considered by the government as unemployed, but as a 'marginally attached worker'.

About 2.5 million persons were marginally attached to the labor force in December, an increase of 578,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Below is a graph of 'discouraged workers', a subset of marginally attached workers, which represents those who want work, but are not actively seeking work due to perceived weak economic conditions. I like to think of the 'discouraged worker' as an indicator of current hiring conditions. If employers are really hiring, the discouraged worker should disappear rather quickly; instead we are experiencing a continued and relentless upward trend in this category of worker.


True Unemployment Rate

I think most of us can agree that the 2.8 million 'marginally attached' workers are in fact, unemployed. If we add the 2.8 million marginally attached workers to the labor force and consider them as unemployed, we get a 11.6% unemployment rate.

Now let's incorporate what we know about marginally attached workers and the civilian labor force to come to a truer unemployment rate. Let's assume for a second that the labor participation rate is at the 67% level we saw in the beginning of the decade and see the effect this has on the unemployment rate.

This will require some simple mathematics.

The current labor force is 236,933,000. An increase from the current 64.6% labor force participation rate to 67% would be met by an attendant rise in labor participants from 153,059,000 to 158,745,000. So about 5.7 million people would be added to the labor force. If we assume the labor force participation rate declined because of an increase in marginally attached workers (unemployed for less than 12 months) and other forgotten individuals (unemployed for more than 12 months), we come up with an effective unemployment rate of 13.2% .

So, the true unemployment rate -which I define (as I think most would) as ALL people who want work but just can't find it- probably lies somewhere between 11.6% and 13.2%. If you consider individuals working part-time for economic reasons as unemployed, you get an unemployment rate north of 17.4%.

In short, the unemployment situation is a lot worse than government statistics would suggest, and this weakness will eventually be reflected in our economy.

This post has been republished from Moses Kim's blog, Expected Returns.